Investment decision in integrated steel plants under uncertainty

Luiz de Magalhães Ozorio, Carlos de Lamare Bastian-Pinto, Tara Keshar Nanda Baidya and Luiz Eduardo Teixeira Brandão

International Review of Financial Analysis, 2013, vol. 27, issue C, 55-64

Abstract: Steel is an alloy composed of iron and carbon for which there are two main large-scale production processes: using iron ore and coal as raw materials through a method known as integrated plants with blast furnaces and using iron scrap melted in electrical furnaces, also known as mini-mills or semi-integrated plants. The production in integrated plants typically implies greater investment, but is more cost-competitive as it provides greater economies of scale. The disadvantage of this method is that the furnaces basically need to work almost continuously through their life span, thus reducing the flexibility of production adjustment to market demands. To attenuate this problem, huge investments in lamination assets are commonly made, generating the possibility of production diversification and valuable switch options. This work values an output switch option in a hypothetical integrated steel plant composed of a blast furnace and a hot laminator. Results show that this option can generate a significant increase in the NPV of blast furnace plants. Results also emphasize the importance of correctly choosing the stochastic process for the underlying uncertainty and the effect it may have on the switch option value.

Keywords: Steel integrated plants; Investment decision; Real options; Monte Carlo simulation; Stochastic processes (search for similar items in EconPapers)
JEL-codes: C61 L61 M21 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:27:y:2013:i:c:p:55-64

DOI: 10.1016/j.irfa.2012.06.003

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